2. International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Conceptual Framework for Financial Reporting Joint World Bank and IFRS Foundation ‘train the trainers’ workshop hosted by the ECCB, 30 April to 4 May 2012 K The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.

3. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Role of the Conceptual Framework Conceptual Framework sets out agreed concepts that underlie financial reporting –objective, qualitative characteristics, element definitions, … IASB uses Conceptual Framework to set standards –enhances consistency across standards –enhances consistency over time as Board members change –provides benchmark for judgments Preparers use Conceptual Framework to develop accounting policies in the absence of specific standard or interpretation –IAS 8 hierarchy 2 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

4. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 33 Objective of financial reporting Provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity Note: other aspects of the Conceptual Framework flow logically from the objective (CF.OB1) Conceptual Framework sets out the concepts that underlie IFRS financial statements and assist the IASB in the development of future IFRSs and in its review of existing IFRSs (CF.Purpose and Status) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

5. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 44 Objective of financial reporting Investors’, lenders’ and other creditors’ expectations about returns depend on their assessment of the amount, timing and uncertainty of (the prospects for) future net cash inflows to the entity. –Decisions by investors about buying, selling or holding equity and debt instruments depend on the returns that they expect from an investment in those instruments, eg dividends, principal and interest payments or market price increases. –Decisions by lenders about providing or settling loans and other forms of credit depend on the principal and interest payments or other returns that they expect. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

6. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 55 Objective of financial reporting To assess an entity’s prospects for future net cash inflows, existing and potential investors, lenders and other creditors need information about: –the resources of the entity; –claims against the entity; and –how efficiently and effectively the entity's management and governing board have discharged their responsibilities to use the entity's resources –eg protecting the entity's resources from unfavourable effects of economic factors such as price and technological changes © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

7. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 66 Qualitative characteristics If financial information is to be useful, it must be relevant and faithfully represent what it purports to represent (ie fundamental qualities). –Financial information without both relevance and faithful representation is not useful, and it cannot be made useful by being more comparable, verifiable, timely or understandable. The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable (ie enhancing qualities—less critical but still highly desirable) –Financial information that is relevant and faithfully represented may still be useful even if it does not have any of the enhancing qualitative characteristics. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

8. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 77 Fundamental qualitative characteristics Relevance: capable of making a difference in users’ decisions –predictive value –confirmatory value –materiality (entity-specific) Faithful representation: faithfully represents the phenomena it purports to represent –completeness (depiction including numbers and words) –neutrality (unbiased) –free from error (ideally) Note: faithful representation replaces reliability © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

9. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 88 Enhancing Qualitative Characteristics Comparability: like things look alike; different things look different Verifiability: knowledgeable and independent observers could reach consensus, but not necessarily complete agreement, that a depiction is a faithful representation Timeliness: having information available to decision-makers in time to be capable of influencing their decisions Understandability: Classify, characterise, and present information clearly and concisely © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

10. © 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 999 Pervasive constraint Reporting financial information imposes costs, and it is important that those costs are justified by the benefits of reporting that information. Benefits include more efficient functioning of capital markets and a lower cost of capital for the economy. Costs include collecting, processing, verifying and disseminating financial information and the costs of analysing and interpreting the information provided. In applying the cost constraint, the IASB assesses whether the benefits of reporting particular information are likely to justify the costs incurred to provide and use that information. Those assessments are usually based on a combination of quantitative and qualitative information. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

11. © 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 10 Summary Reporting financial information that is relevant and faithfully represents what it purports to represent helps users to make decisions with more confidence (ie financial information must possess the fundamental qualitative characteristics). IFRS requirements must be cost-beneficial Applying the enhancing qualitative characteristics is an iterative process that does not follow a prescribed order. Sometimes, one enhancing qualitative characteristic may have to be diminished to maximise another qualitative characteristic. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

12. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 11 Elements Asset: Resource controlled as a result of past events and from which future economic benefits are expected to flow Liability: Present obligation arising from past events, the settlement of which is expected to result in outflow of resources embodying economic benefits Equity: Assets minus liabilities Income (expense): Increases (decreases) in economic benefits during period from inflows or enhancements (outflows or depletions) of assets (liabilities) or decreases (incurrences) of liabilities from in increases (decreases) in equity, other than contributions from (distributions to) equity © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

13. © 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 12 Recognition Accrual basis of accounting –recognise element (eg asset) when satisfy definition and recognition criteria Recognise item that meets element definition when –probable that benefits will flow to/from the entity –has cost or value that can measured reliably © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

14. © 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 13 Recognition What does probable mean? The meaning of probable is determined at the standards level. Therefore, inconsistent use across IFRSs What does measure reliably mean? To a large extent, financial reports are based on estimates, judgements and models rather than exact depictions. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

15. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 14 Measurement concepts 14 Measurement is the process of determining monetary amounts at which elements are recognised and carried. (CF.4.54) To a large extent, financial reports are based on estimates, judgements and models rather than exact depictions. The Framework establishes the concepts that underlie those estimates, judgements and models (CF.OB11) IASB guided by objective and qualitative characteristics when specifying measurements. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

16. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 15 Presentation and disclosure Objective of financial reporting Presentation: financial statements portray financial effects of transactions and events by: –grouping into broad classes (the elements, eg asset) –sub-classify elements (eg assets sub-classified by their nature or function in the business) IAS 1 –application of IFRSs with additional disclosures when necessary results in a fair presentation (faithful representation of transactions, events and conditions) –don’t offset assets & liabilities or income & expenses © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

17. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 16 Derecognition of assets 16 Derecognition of an asset refers to when an asset previously recognised by an entity is removed from the entity’s statement of financial position –derecognition requirements are specified at the standards level. –derecognition does not necessarily occur when the asset no longer satisfies the conditions specified for its initial recognition (ie derecognition does not necessarily coincide with the loss of control of the asset ) IASB guided by objective, qualitative characteristics and elements © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

18. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 17 Common ‘conceptual’ misunderstandings The Framework does not…Clarification—the Framework includes include a matching conceptaccrual basis of accounting— recognise elements when satisfy definition and recognition criteria include prudence/conservatism concept neutrality concept include an element other comprehensive income (or a concept for OCI) only the following elements— asset, liability, equity, income and expense mention management intent or business model © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

19. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 18 Common ‘conceptual’ misunderstandings continued MisunderstandingClarification Uniformity = comparabilityComparability is achieved when like things are accounted for in the same way. Comparability is not achieve when accounting rules require unlike things be accounted for in the same way © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

20. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 19 Common ‘conceptual’ misunderstandings continued MisunderstandingClarification There is a clear concept for the historical cost of an item The Framework provides only a vague description—assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. What is cost when: - advance/deferred payment? - purchased option exercised? - contingent purchase price?

21. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 20 Common ‘conceptual’ misunderstandings continued MisunderstandingClarification Principles are necessarily less rigorous than rules Rules are the tools of financial engineers There are few judgements and estimates in cost-based measurements Inventory, eg allocate joint costs and production overheads PPE, eg costs to dismantle/restore site, useful life, residual value, depreciation method Provisions, eg uncertain timing and amount of expected future cash flows

22. © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 21 Questions or comments? Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

23. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 22 The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2012 with an effective date after 1 January 2012 but not the IFRSs they will replace. The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise. 22 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org